Why Do Oil Companies Manage Their Own Logistics?

10/11/2015

MNP-Body

As Canada’s upstream petroleum industry struggles to deal with low commodity prices, more and more attention is being paid to the relationship between exploration and production companies (E&P) and their oilfield service (OFS) suppliers. Clients have successfully extracted as much price reduction as they can from their vendors. The next step to putting the next barrel of oil on stream, at the lowest possible cost, is a major breakthrough in operational efficiency. Whether it is the client or the vendor making the changes, progress will be defined as the most effective party possible doing the work. Egos must go on the shelf. It’s that important.

To fully understand who should be doing what, it is useful to examine what each party does best. An oil company, for example, has as its primary purpose the location and extraction of oil and gas from previously unknown or uneconomic hydrocarbon reservoirs. The core skills are reservoir identification, geology and finance. Oil companies also specialize in knowledge-based project management in the sense that they must be capable or skilled in all facets of oil and gas development, from the reservoir to the point of sale. But the fact E&P companies long ago became project managers is more related to the need than any specific aptitude.

Service companies, on the other hand, have as primary assets equipment, expertise and inventory.

Many have little or no understanding of reservoir characteristics or geology. They don’t really understand the entire process of finding and extracting hydrocarbons, nor are they asked to. But what they are very good at is logistics; the process of making sure what is required arrives where it is required when it is required. Bigger service companies do this hundreds of times a day at various locations across Canada and around the world. Logistic and scheduling is part of OFS’s DNA.

In a study MNP did for the Petroleum Services Association of Canada in early 2014, the number of individual services and the work force required to deliver those services was calculated for three common horizontal well profiles; the deep basin, west central Alberta, and southeast Saskatchewan.

Assuming all rental equipment came from a single vendor (which it never does), there were 45 or more individual service companies required to drill and complete a single well. In terms of repairing the location (lease and camp) and logistics (primarily trucking), some 32% of the manpower was engaged in this process in the deep basin; 48% of the workforce did this work in west central Alberta, and 38% of the workforce performed these tasks in southeast Saskatchewan. The rest of the labour in each of these cases was dedicated to drilling and completing the well, the technical and reservoir-based component of the project.

Drilling and completing a modern horizontal well is a major logistical undertaking. With some four dozen individual vendors coming and going at various phases in the process, these wells are as much about procuring quotes, analyzing bids, negotiating prices, dispatching service and supply companies and making sure the trains run on time. When the right stuff doesn’t show up in the right place at the right time, project delays and cost overruns are assured, regardless of the individual component prices negotiated with various vendors.

It has always been accepted that project management including logistics is a core skill of an oil company. However, history has proven often it is not. In the oilsands, for example, operators do not even attempt to manage all the intricate details of these massive capital projects. They hire engineering, procurement, and construction (EPC) companies to manage the project. The oil company provides capital and oversight.

Is a multi-well horizontal drilling project off of a single surface location materially different than a small scale oil sands project? What does the oil company really want and need from this investment? It wants a straight, perfectly positioned, well-drilled drain hole right down the identified sweet spot of the reservoir being targeted, one that, when completed, will yield the maximum amount of oil over its economic life at the lowest possible cost.

What really matters to achieve optimal reservoir exploitation is the rig’s mud system and reliability, hole size, kickoff point, rate of build through the bend, the mud system, drilling tools, and the planned direction of the wellbore. What matters much less is who builds the lease and supplies all of the rental components such as matting, camp, light towers, wellsite trailers and the myriad of other parts and pieces certainly required to drill the well, but which ultimately have no bearing on the quality of the wellbore or the well’s future production.

In the quest to reduce finding and development costs, one of the major factors which is been identified as an area of potential savings is trucking. Trucks either drive to location loaded and come back empty, or drive to location empty and come back loaded. In the non-oilfield transportation world one of the primary objectives of trucking operators is to avoid empty back hauls or “deadheads.” Numerous entrepreneurs have been trying to develop software-based dispatch programs whereby other clients can take advantage of empty trucks which have delivered their loads or are going to pick up a load.

While this is a good idea, it overlooks the fundamental problem. Each and every oil company, even those operating in the same general area, believes it is important they manage their own operation, and in doing so make no attempt to cooperate with other oil companies to find ways to reduce total costs. They will share technical information from time to time, at engineering forums or special-purpose conferences. But in terms of the most basic opportunities to save money – “Hey Joe, your rig is right beside mine. Got any empty trucks heading back to town today?” –industry has a long way to go.

One oil patch trucking veteran observed operators tend to view equipment pickup and delivery as a “just in time” event, and therefore synchronizing equipment movement to truck availability is not practical. However, with rental equipment surpluses industry-wide, it may be possible to only pay rent when assets are used, not when they’re being mobilized and demobilized.

Again, solutions are never simple. But a discussion about the nature of the problem is essential.

To make progress, oil company operations departments have to either be told or accept the fact there are elements of the work they do which are not directly related to the primary objective of their employer, which is to put oil and gas on stream at the lowest possible cost. They are essential, of course, but do they really have to be done by the oil company itself?

Further, why don’t oil companies consider outsourcing major elements of horizontal well drilling and completion to third-party logistics experts, the same way they do in the oilsands? Oilfield trucking giant Mullen Group, for example, has some 1,250 trucks on the road every day. These are people who understand logistics.

If people would truly think out-of-the-box, why wouldn’t oil companies consider consulting project managers or smaller scale EPC contractors, which would focus on the details of procurement and delivery in both directions, leaving the operator to focus more attention on what matters the most; the construction of the perfect wellbore. While some large service companies offer integrated project management services, they also seek to provide some of the required services. This is perceived as a conflict of interest by some clients, and it is probably true. The pure project manager employed on major capital projects like oil sands supplies nothing but engineering and expertise.

On the day this article is being written, there are about 200 rigs drilling in Western Canada. These are being operated by 57 different oil companies. While some of these operators are small, and therefore are likely to hire independent consulting engineering companies, the majority of the rigs are run by oil companies with fully staffed procurement, drilling and operations departments. The service sector knows better than anyone the operational capabilities of E&P companies are all over the map. The regional cooperation by which multiple operators could take advantage of economies of scale on procurement, dispatch, transportation and logistics does not exist to any meaningful extent.

An admission by today’s oil company it is not really good at everything may take a significant extension of the current financial misery to become reality. But, perhaps in the ever fertile imaginations of the dynamic oilfield service industry, an opportunity exists for one or more entrepreneurs to step forward with the cost-saving solutions this article has attempted to articulate.